On 10 July 2013, an interesting debate on the Greek crisis took place between Daniel Gros, the director of the Brussels-based research institute CEPS, Gikas Hardouvelis, professor of Finance at the University of Piraeus and Chief economist at Eurobank, and Aristos Doxiadis, a venture capitalist. The debate was organized by IOBE, a Greek research institute, and the Athens office of Konrad Adenauer Stiftung, a German research institute. The speakers’ presentations can be found at the Konrad Adenauer Stiftung site: http://www.kas.de/griechenland/en/publications/34976/, as well as here (Doxiadis, Gros, Hardouvelis). All presenters agreed on the diagnosis of the severity of the Greek depression, which has been going on for the last 6 years. But they disagreed on the policy mix going forward. In particular, Greece-based presenters felt that additional austerity measures in the short run would be counterproductive and would deepen the crisis, but Daniel Gros strongly endorsed such measures. Gikas Hardouvelis gives his take on the event.
A mid-summer 2013 debate in Athens, Greece
“The Content of Growth”
August 11, 2013
All presenters agreed on the diagnosis of the severity of the Greek depression, which has been going on for the last 6 years. They pointed to the problem of past over-consumption, the small size of the exports sector and the small size of exporting firms, the lack of cost- and price- competitiveness, the low quality of the educational system, the inefficiency of the public sector and its past huge fiscal deficits and, more generally, lack of high-quality institutions in Greece. Reading their presentations, one can see that all speakers were in broad agreement. Economists, after all, rarely disagree on the determinants of long-term growth, the need for reforms and for building quality institutions.
A lively debate followed, which focused on the differences among the speakers on what is to be done today to end the protracted contraction. Yet, some of the measures that are known to promote long-term growth can have adverse immediate effects, like intensifying the contraction. Both Greece-based presenters disagreed with additional austerity measures, but these were strongly endorsed by Daniel Gros, even for the short-run. The remainder of this text describes issues that drew particular attention and stimulated discussion among the Greek audience.Daniel Gros emphasized the need to close the current account deficit. Once this is accomplished, the Greek crisis stops being a major European concern, he claimed, as no one outside Greece would have to finance Greek over-consumption. For example, if general government deficits continue, they would then need to be financed by the Greek private sector, and thus they would no longer have to be carried by foreign entities. Greece, in other words, would no longer be a source of contagion risk to the rest of Europe.
“Starve the beast” was a phrase Daniel Gros repeated many times, referring to the requirement of abiding by budget constraints no matter what the consequences are for the equilibrium the economy ends up settling at. Yet, starving the beast (i.e. the Greek State) today, at the present critical juncture, I recall saying to him, may kill the beast altogether instead of curing it. In other words, a really bad equilibrium may come out. The economy today may be reaching a bifurcation point, and if it were to be pushed further by a more restrictive fiscal policy, it could unravel completely. Two thirds of the targeted fiscal contraction has been accomplished, but completing the remaining one third may not be that easy if the economy continues to shrink.
In response, I proposed the following: “What if Europeans, instead of pushing for an additional fiscal contraction, were to allow for a smoother fiscal consolidation by lending another €10bn to cover Greece’s needs up to 2016, thus avoiding an immediate negative fiscal shock and allowing the economy to stabilize? This way, they can buy more supervisory time as well, say, another 4-5 years, and thus ensure that on-going reforms are consolidated and would not be removed in the future by the various interest groups.”
Paraphrasing Daniel Gros, the gist of his answer was: “No, we have given you too much money already. The ECB has also lent you a lot of money. Fixing your country is your problem. All we care about is a zero current account. ”
“Starve the beast” was Daniel Gros’ prescription for banks as well. Recall that in Greece banks suffered collateral damage by the crisis; they did not initiate the crisis. Gros would like to see immediate loan write-offs and clean balance sheets, so that fresh loans can be given to new firms. He discounted the current credit crunch as being a serious problem altogether, and did not seem to appreciate (as I perceived it) the seriousness of exporters’ problems in financing their purchase of intermediate goods.
One response to Gros was that there is little money left to capitalize the banks, perhaps around €10bn from the original €50bn that was given for resolution and recapitalization. Thus there may be no money for huge additional write-offs. In addition, the banks are doing a lot of debt restructuring in their effort to keep the healthy firms alive. Cutting that umbilical cord may create more problems than solve.
Overall, Gros’ presentation reflected a view that other countries in the European South have been able to deal with their problems a lot better than Greece. His slides show that after the crisis, exports rose faster in those countries. Although both Doxiadis and I explained the reasons behind the weak increase in Greek exports, he held on to his view: Greece is an outlier, a country that has a hard time adjusting to the financing constraints it faces within the Euro Area. The obvious conclusion for the audience followed naturally: An outlier in the EMU today is a lot easier to handle via tough measures, as contagion is no longer of critical importance in the minds of “hardliner” policy makers. This was a rude awakening for many in the Greek audience.
Should we then expect the hardliner position to take hold in the autumn of 2013, after the German elections? Will the Greek rude awakening continue to become a lonely cloudy day of fighting for survival within the Euro Area? The outcome is not that clear, as there are forces that oppose the hardliner view. First, there is the IMF view, which insists on OSI and debt relief. True, the IMF does not call the shots as it puts down a small share of the cash, but its know-how constitutes an intellectual advantage and its experience does count. Second, not all European policy makers are hardliners; furthermore, too much money has so far been invested in Greece to let the project fail now. And since December 2012, the Eurozone countries as a whole have signalled their willingness to help with fiscal or debt relief, assuming that the Greeks deliver on the promised reforms and on bringing the primary deficit to zero in 2013.
The day can turn sunny after all!